Institutional Investor's Alpha Magazine - November 2008 - (Page 42)

Hedge Fund Seeding highly efﬁcient animals that will come out of the hedge fund industry will be the most nimble, the most likely to adapt,” he says. As market and liquidity risks persist, hedge funds and the firms that seed them will no doubt face huge dangers. The shakeout promises a rare opportunity for seeders. “As a signiﬁcant number of hedge funds contract or shut down and new launches are shelved, there will be a ﬂood of talent for seeders to choose from,” says Dominic Freemantle, the London-based head of European capital introduction for Morgan Stanley. That puts them in the position of being able to deal only with managers with proven track records at prominent hedge funds, though of course even that is no guarantee of success, especially in these markets. Jonathan Urﬁg, a former portfolio manager at $5.7 billion New York–based Third Point Capital, for example, was seeded last October by SkyBridge. His new ﬁrm, New York–based, $128 million U Capital Group — like many funds — has delivered a sodden performance this year and is down 19 percent through September 30. SkyBridge itself was down about 12 percent for the ﬁrst nine months of this year. Most seeders are reacting to such difﬁculties by tightening the yokes on their progeny and negotiating tougher Williams is taking a similar approach. “We have deliberately been slower in allocating money in 2008,” he notes. “We hope to do six to eight deals next year.” FRM Capital was approached by more than 500 managers this year and has seeded only two: Victory Park Capital Advisors, an established Chicago-based ﬁrm that provides asset-backed funding to small- and middle-market companies, and London-based Beechbrook Capital, which invests in leveraged ﬁnancial assets. After receiving $75 million in seed capital from FRM Capital in May 2008, Beechbrook Mezzanine I launched in September. “We are carefully selecting a diversiﬁed portfolio of assets that will be resilient to the economic downturn,” says Beechbrook co-founder Nick Fenn, whose partner, Paul Shea, says choosing a seeding partner isn’t just about money. “We are beneﬁting from their advice in building up a fund management business that will meet exacting institutional investor standards,” Shea explains, adding that FRM Capital is providing technical support and payroll, accounting, compliance and legal help. The number of established but stalled managers who need acceleration capital to reach a size that will attract institutional investors is growing along with the ranks of those who have lost assets and need rescue capital. Two examples: Max Trautman and Gary Link, who exited Peloton Partners in 2006 (long before Peloton became one of the notable hedge fund failures of 2008) to launch London-based Stoneworks Asset Management, a global macro hedge fund firm. They were able to raise only $20 million and found they were trying to run the business with too few assets under management. “Given we’re a ten-person outﬁt, we need more than $100 million in assets under management to cover the people and infrastructure costs,” explains Link, the CEO and COO. “Investcorp was ready, willing and able to commit more capital than the others.” In August 2007, Investcorp agreed to seed Stoneworks $100 million. Similarly, David Moradi needed a bailout after Merrill Lynch pulled out of a joint seeding venture with Pequot Capital Management last year. “I was interested in a committed strategic partner that would provide a long-term base of capital and allow for full autonomy to manage and grow the business,” says Moradi, who had left his job as a long-short equity portfolio manager at Soros Fund Management for the incubation program at Pequot in August 2006. After declining offers from several ﬁrms, including Citadel, Moradi took a deal with Protégé Partners, which offered $75 million in seed capital to launch Anthion Management, a New York–based long-short equity fund. It seems safe to expect a lengthening line of hedge fund managers with their hands out in the coming months. Seeder ﬁrms are anticipating this and are poised to shore up those parts of the industry that are salvageable: “There will be big winners and a lot of losers,” says Stern, the Reservoir Capital CEO. “Seed capital will be used to pick the winners.” “People now accept the fact that it has gotten harder to start a hedge fund.” — CHRIS ACITO, COO, INVESTCORP terms. A seed ﬁrm can structure a deal whereby it can cut a hedge fund loose, taking back whatever is left of its capital if the fund’s assets drop by as little as 5 percent, says Alex Benasuli, founder of Barcelona-based emerging-markets fund Pyrenees Capital, which was seeded by Protégé Partners in 2004. Benasuli was able to negotiate more-lenient terms: Protégé can’t pull its capital unless Pyrenees suffers at least a 15 percent drop in assets. Wood says Capital Z is well protected and that the ﬁrm’s seeds must stay within certain levels of risk and transparency: “We have significant negative consent rights, such as antifraud and strategy-migration protections, where if they are violated, we can say we’re taking our money back.” (Wood knows the business: In a previous life as a senior investment ofﬁcer at CalPERS, where she was tasked with investing a $150 billion global equities portfolio, she was deeply involved in seeding new managers.) Some seeder ﬁrms are lying low for now. Acito, the seeding COO at Investcorp, says he will hold off on any new commitments until 2009. FRM Capital’s de Gentile42 • INSTITUTIONAL INVESTOR’S ALPHA • NOVEMBER 2008

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - November 2008

Institutional Investor's Alpha Magazine - November 2008 Contents Letter from the Editor Longs & Shorts Pension Corner: Risk Rewarded The Good Guys: In the Here and Now Interview: Minister of Finance Cover Story: The Agony of Dan Zwirn Strategies: The Early Birds Are Awake Strategies: The Call of Shari’a Profile: Sweet Home Chicago Research Center: What Stampede? Alpha Bytes: Centralize the Data Unhedged: Commentary: Learning from the Wreckage

Institutional Investor's Alpha Magazine - November 2008

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